Despite technology advances and continuous innovation, no one can precisely predict natural disaster occurrences nor control its damages, said Dr Tien-Mu Huang, Vice Chairman of the Financial Supervisory Commission (FSC), Taiwan, at the 15th Conference on Catastrophe Insurance in Asia yesterday. Citing catastrophic losses and severe impacts on the global insurance industry from events such as the Queensland and Thai floods, the Tohoku earthquake and Typhoon Morakot, he noted that economic losses caused by Nat CATs usually affect not just one country or region, but also tend to spread to the whole world. He thus urged both industry and governments alike to pay serious heed to disaster risk management issues and look to tackle them via insurance, capital market solutions and regional collaborations.

Disaster-financing readiness is crucial

Sharing a similar theme in her keynote message, Ms Grace Lee, Director General of the Insurance Bureau, FSC, noted that APEC economies face Nat CAT losses of about US$100 billion each year. “Financial protection is the key to CAT risk management. Each country needs to assess and reduce its contingent liabilities, have good budget management, as well as develop financing tools for before and after the disaster.”

On financing mechanisms, aside from national and regional risk pools, she mooted catastrophe bonds as a successful form of risk transfer. Taiwan’s 2003 issuance of the Formosa Re CAT bond was its first foray into capital market financing, and it was the second market in Asia to do so, after Japan. While not yet prevalent in Asia, she noted that CAT bonds have the potential to become another important risk transfer tool other than insurance; in 2016, total CAT bond issuance stood at US$5.5 billion, with an unexpired sum currently totaling a record high of over US$22 billion.

However, given its complex nature, disaster risk management considerations “go beyond simply insurance arrangements” and are also reliant on mutual cooperation between governments and the industry. Taiwan’s non-life insurance association Chairman Steve Chen called on all stakeholders to work together to strengthen regional and global cooperation in tackling disaster challenges. “Without better knowing the risks and exposures, we can’t improve business sustainability, and without better sharing of knowledge and experiences, it will take a longer time for us to build adequate business models.”

Evolving role of CAT models

Meanwhile, Mr Hemant Nagpal, RMS Director of Model Product Management, shared that catastrophe models are no longer just insurance tools, and insights from holistic risk management solutions may not only be used for risk transfer, but also risk management. As markets increasingly focus on operational efficiency, along with the perennial quest for growth and profitability, he said these factors will drive the need for digitalisation, underwriting discipline and more advanced data management and analytics capabilities. “Regulators within the region will also continue to synchronise solvency regulations and risk-based capital frameworks, which will raise the usage and need for CAT modelling tools,” he added.

Non-traditional risks, potential catastrophic impacts

Separately, Aon Benfield Greater China CEO Qin Lu gave a rundown of the top risks on the horizon according to the broker’s 2017 survey, which included reputational damage, economic slowdown, regulatory changes, cyber attacks, business interruption and political risks among others. While these risks were not traditional disaster risks like earthquake and floods per se, they should not be overlooked as the impact from a cyber attack such as the recent WannaCry event in May could potentially have catastrophic consequences. He noted that the WannaCry attack was likely “the first time the effect of a cyber attack was so closely felt by the wider public”.

Elaborating on risk trends, Mr Lu highlighted the significant leap in concern for cyber, as well as the resurface of political risk and uncertainties among the top ten risks. Brexit, multiple election surprises and political scandals, as well as the recent rise of populism and trade protectionism he said, will likely have significant economic and social implications globally.

Beware the “underrated” risks too

But more than the top risks, insurers also need to take note of “underrated and connected risks”, such as exchange rate fluctuations, commodity prices, liquidity and capital availability, workforce shortage and supply chain failures. Seemingly increasing “anti-globalisation” could lead to possible changes to existing trade agreements and immigration policies, which could impact on industries that rely heavily on imports of goods, services and talent from across the world, despite being “underrated”.

“Industries like retail, in which goods are being manufactured across myriad locations, or healthcare and hospitality, in which there is a reliance on a multinational workforce, will find that these risks will grow in importance over the coming years.” He added that most of these risks are either partially uninsurable, or are yet to have solutions devised for them, and hence the industry has a lot more to work on to provide more protection to society.

The conference, which ends today, was organised by Asia Insurance Review and sponsored by RMS, with support from the Non-Life Insurance Association of the Republic of China; Taiwan Insurance Institute; Taiwan Typhoon and Flood Research Institute; ACTS; International Insurance Society; and the Reinsurance Brokers Association of Singapore.